public private ventures program facilities officers conference · “creating a more educated...

“Creating a More Educated Georgia”

Public Private Ventures Program

Facilities Officers ConferenceOctober 27, 2011


Public Private Ventures Program The program is used primarily for projects that are self

supporting ( housing rents, user fees, research funds, and redirection of rental payments).

Private Interest Developers University Foundations Non-profit Organizations Limited Liability Corporations (LLC) USG Real Estate Foundation

Project Financing Bonds (tax-exempt & taxable) Credit Enhancement (bond insurance & letter of credit) Rated Bond Issues (no credit enhancement)


Public Private Venture ProgramGeorgia Structure

Following is a brief description of the structure typicallyused in Georgia PPV transactions.

• The Board of Regents of the University System of Georgia (the“BOR”) leases land on campus to a LLC under a ground lease for aterm equal to the bonds: – when the bonds are paid in full, the ground lease terminates andthe facility reverts to the BOR.

• The LLC and the BOR enter into a rental agreement under which the BOR agrees to lease the completed facility under a “triple-net” lease arrangement for rents sufficient to pay the principal andinterest of the bonds. The University is responsible for the operation of the facility


Portfolio Update (10-25-11) 172 projects - $3.891 Billion

Including 14 projects under construction

Located on 33 of 35 institutions

A variety of facility types including: Housing 40,012 beds Parking 27,697 spaces Student Support 2,538,437 sq. ft. Research 1,449,421 sq. ft. Instructional 1,044,275 sq. ft. Office 999,762 sq. ft. Stadium Seats 35,488 seats


Student Housing

Dorms, Semi-Suites, Suites, & Apartments

Board of Regents requires a Comprehensive Housing Plan and Market Study

Housing Rents cover rent to Foundation, operating cost, & repair and replacement reserves

Savannah State

Gordon College


Student SupportFacilities Student Centers, Student

Unions, Student Learning Support, Recreation Centers, Parking Decks

Board of Regents requires student fee committee to vote for assessing student fees

Needs assessment shall be conducted that obtains student input (focus groups, surveys, workshops, etc)

Student Fees are used to pay rent to Foundation, some operating costs, building reserves

Georgia Gwinnett CollegeParking Deck

Augusta State UniversityStudent Center


Research, Office, and Instructional

Research funding used to cover rent to Foundation and building reserves

The redirection of rental payments to new and existing facilities

Medical College of Georgia Cancer Research Center

Georgia Perimeter CollegeNewton Campus


Underwriting Guidelines Income and Expenses can not increase more than

3% per year

Funding Repair and Replacement Reserves

Debt Coverage Ratio must equal at least 1.05

Level Debt Service Payments/Fixed Interest Rate

Fund at least 6 months capitalized interest after construction completion to create project reserves

Performance of previous PPV’s and Debt Capacity

Financial Risk Mitigation Strategy

1st

2nd

3rd

• Project Cash Reserves created by funding at least 6 months of capitalized interest after construction completion

• Auxiliary unallocated balances

• Institutional funds (non-state)

9

Required Debt Service Coverage Ratio: 1.05 to provide cushion


Management & OperationsPPV Project

Accountability

Insurance

Managing Risks and Preserving Value

“Performance Matters”

Physical Conditions Documented

Lease Payment/Debt Service Analysis

Adequate & Proper Coverage

Cash Flow PhysicalConditions

Pooled Coverage 5-Year 3rd Party Physical Assessment

Annual Reporting of Financial Performance

Risk Mitigation across Portfolio

Repair & Replacement Reserve Analysis

Revenues & Expenses Analysis


Asset Management Close-out of Fiscal Year PPV Projects

Focus on whether your projects are Self-Liquidating Benchmark against proforma Confirm recorded expenses are specific to project

Contact Cynthia Alexander regarding Cash Flow Issues If cash flow is not consistent with proforma If proforma needs to be re-cast

Rating Agency Alert If you get calls or notice of review or changes in rating call

and get us involved Lease Renewal Form for each PPV

Send a copy to Cynthia Alexander


Questions?

Christine T. HolmesSenior Vice President

Merchant Capital, [email protected]

404-797-4006

15th Annual Facilities Officers ConferenceOctober 26-28, 2011Cunningham CenterColumbus State University

University System of GeorgiaPublic Private Venture Financings

STRICTLY CONFIDENTIAL

Why utilize privatized structures?■ Faster completion

■ Streamline procurement process

■ Funding limits or restrictions

■ Private funding source

■ Non-recourse to University *

■ Off-balance sheet and off-credit *

■ 100% project financing

■ Philosophical shift

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* Varies based on University involvement

University System of Georgia PPV structure

15

Foundation LLC* Owns Project ** Legal Obligor *

University Student / User’s

Board of Regents

Governmental Authority

Bond Investors

Real Estate Foundation

Trustee

Ground LeaseRental Agreement

■ Vets and Approves Project■ Approves Financing Structure■ Reviews Construction Documents■ Provides Post-closing Oversight■ Executes the Rental Agreement

Sole Memberof LLC

Debt Service PaymentDebt Service

Payment

Loan Agreement

Housing RentsStudent FeesFacilities Mgmt

Agreement

Housing RentsStudent Fees

Summary of potential financing options

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Financing Observations Traditional University University-Affiliated

FoundationUnaffiliated-Nonprofit

Corporation Fully Privatized

Cost of Capital Lowest Slightly Higher Higher Highest

Credit Rating (1) Aaa Aa2 – A1 A3 – Baa Baa - Below

Tax-ExemptFinancing Available Available Potentially Available Not Available

Off-balance Sheet Treatment Not Possible Not Possible Possible Yes

Level of University Control Highest High if managed by University, but lower if

managed by outside management firm Lowest

Financial Return for University Highest High Moderate Low

Ease of Implementation Lowest Moderate Moderate Highest

NOTES:(1) For illustrative purposes only. Based on Moody’s ratings.

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Off Balance Sheet and PPV

Rated Baa3 (BBB-) Coverage Requirement – 1.20x Cash Funded Reserve 100%

Requirement First Fill Agreement Freshmen & Sophomore Housing

Requirement Construction Risk Requirements Insurance Premium Rate – 225 bps Cost of Capital – 5.45%

Off Balance Sheet

Rated A+ Coverage Requirement -1.05x Cash Funded Reserve 50%

Requirement No Fill Agreement or Housing

Requirement Construction Risk Requirements Insurance Premium Rate – 65

bps Cost of Capital – 4.88%

Georgia Board of Regents

Team members involved in PPV bond issues■ University

■ Foundation / LLC – Project Owner

■ Board of Regents

■ Project Consultant or Program Manager

■ General Contractor / Developer

■ Issuer and Issuer’s Counsel

■ Bond Counsel

■ Underwriter and Underwriter’s Counsel

■ Trustee

■ Rating Agency

■ Credit Enhancer

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Credit criteria for financing a PPV■ University

– Market position? Governance? Operating performance?

– What are the university’s current capital needs? Long-range capital plans?

– Has the university participated in a PPV financing before? If so, how is the project performing?

■ Project

– Who is legal obligor? Relationship to university?

– Is the university involved? If so, what role?

– Location of project? Is it located on university-owned land?

– Strategic importance of the project?

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Credit criteria for financing a PPV (continued)■ Bond / Legal Structure

– Project revenues? Mandatory or discretionary fees? What is the security pledge?

– Projected assumptions in proforma?

– How is construction risk addressed?

– Flow of funds

– Is a debt service reserve fund established? Cash funded at 100% or 50% of requirement? Surety bond?

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Moody’s■ Ratings reflect a blended assessment based on (1) the lease agreement

with the Board of Regents and (2) underlying credit characteristics of the university, which ranges from “Aa2” to “A3”.

■ Strengths include:

– Strategic importance of the projects

– Initial approval and continued oversight by Board of Regents

■ Challenges include:

– Rental payments are subject to annual renewal

– Certificate of occupancy must be issued before rental payments begin

– Construction risk can be mitigated, but not eliminated

– Challenging state funding environment

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Standard & Poor’s■ Ratings reflect the lease agreement with the Board of Regents, which is

currently “A+”.

■ Strengths include:

– Strategic importance of the projects

– Initial approval and continued oversight by Board of Regents

– University System of Georgia’s large, comprehensive role as the state’s system of higher education

■ Challenges include:

– Annual appropriation risk and abatement risk

– Rapid growth of debt issued by the University System of Georgia

– Construction risk can be mitigated, but not eliminated

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Assured Guaranty

Insurance policies are irrevocable and guarantee the timely payment of principal and interest on bonds to investors.

Requirements would be significantly more stringent without the Rental Agreement .

Assured Guaranty’s analytical approach to USG PPV is multifaceted combining elements of off balance sheet / project finance and tradition higher education analytics.

Risks include: Ability of individual institutions to attract students Risk of Damage to the facility and abatement of rent by Board Project Self Sustainability Appropriation and Allocation Risk of the Board Construction Risk – Rents payable upon completion of project

Construction risk can be mitigated■ The following strategies have been used to mitigate construction risk:

– All drawings, designs, studies and engineering reports will be final before bond sale

– Payment and performance bonds for the full project cost

– Construction contract will have a guaranteed completion date for a guaranteed maximum price (GMP)

– Builders Risk Insurance

– Collateral assignment of construction agreements to the trustee

– Six months of capitalized interest beyond expected completion date

– Reasonable level of liquidated damages

– Principal payments do not start until the following year project is placed in service

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What are the Changes Going Forward?

• BoR• Rating Agencies• Credit Enhancer• Structural• Market• Political

University System of GeorgiaFacilities Officer Conference

Confidential – For Discussion & General Information Purposes Only

15th Annual Facilities Officers ConferenceOctober 26-28, 2011Cunningham CenterColumbus State University

Facilities Officers Conference – October 27, 2011

2.50%

3.00%

3.50%

4.00%

4.50%

9/1 9/11 9/21 10/1 10/11 10/21

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Interest Rate Market Update

2.00

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Rat

es (

%)

US TreasuryAAA G.O. MMD

Long –Term: 30-Year Treasury and MMD (tax-exempt)

Source: Thomson Financial as of October 2011

2.75

3.25

3.75

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4.75

5.25

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e (%

)

Short-Term: 30-Year Treasury and MMD (tax-exempt)

Ratio of MMD/Treas.

Current 1.23Average 1.00High 1.29Low 0.86

Long Term:US Treasury and Tax-

Exempt Rates are down over 600 basis points over

the 10 year period

Short Term:US Treasury and Tax-

Exempt Rates are down over 225 basis points over a

1 year period

Current Rates: 10yr. 30yr.

US Treasury: 2.19% 3.21%

Tax-Exempt : 2.42% 3.72%

Facilities Officers Conference – October 27, 2011 28

0.00%

1.00%

2.00%

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9.00%

1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13

How Did Japan’s Recession Impact Bond Yields?

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Japan’s 10Y bond yield fell below 2% in 1997 and has since spent 83% of the time below that level Japanese yields have remained at this historically low level for the past 14 years

Historical 10Y Bond YieldsJapan and US

Source: Bloomberg

USUSJapan

Japan US

Current 1.01% 2.19%High 4.72% 7.88%Average 1.71% 4.78%Low 0.45% 1.72%


1.50%

2.00%

2.50%

3.00%

3.50%

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4.50%

5.00%

5.50%

1/1/

07

4/1/

07

7/1/

07

10/1

/07

1/1/

08

4/1/

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7/1/

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10/1

/08

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/09

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7/1/

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/11

10-Y

ear

U.S

. Tr

easu

ry Y

ield

(%

)

Treasury Yields Have Moved Counterintuitive to QE Anticipation versus Actual Purchases

Source: Bloomberg

10-Year U.S. Treasury Yield

11/25/2008QE1 announced

1/1/2009QE1 purchases begin

3/31/2010QE1 purchases end

8/27/2010Jackson Hole speech hinted QE2

11/3/2010QE2 purchases begin

It was fair to believe that this was the end of the world as we know it

Terrible economy, which led to anticipation of QE2

9/21/2011Operation Twist announced


($5,000,000)

($4,000,000)

($3,000,000)

($2,000,000)

($1,000,000)

$0

$1,000,000

$2,000,000

$3,000,000

1/3/

2007

5/3/

2007

9/3/

2007

1/3/

2008

5/3/

2008

9/3/

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1/3/

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5/3/

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9/3/

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1/3/

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5/3/

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9/3/

2010

1/3/

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5/3/

2011

9/3/

2011

Wee

kly

Infl

ows/

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ws

($U

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Week Ending

30

Municipal Bond Fund Flows

Source: Lipper FMI as of October 2011

After massive outflows from November 2010 through June 2011, investors have

recently started to leave the sidelines and money is

trickling back into municipal bond funds

Even with this reduction in the buying power of

municipal bond funds, the market hasn’t experienced

symptoms of reduced demand because volume

has been so depressed

Weekly Municipal Bond Fund Flows: 2007 to Present


Holders of Municipal Debt

Municipal bonds remain largely in the hands of professional investors

although retail represents the largest investor segment

at 37% of all current holdings

As municipal bond fund outflows and political

debate over long-term tax exemptions threaten demand, will retail

investors pick up the slack?

Source: Bond Buyer Market Statistics. * YTD 2011 as of June 30, 2011.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD*

Mu

nic

ipal

Bon

d H

old

ings

in $

Bil

l

Brokers & Dealers

Foreign Holdings

Other

Closed-End Funds

Life Insurance Co.

U.S. Commercial Banks

Money Market Funds

Property & Casualty Insurance

Mutual Funds

Households

Top 10 Holders of Municipal Bonds by Investor Segment


USG Institution Credit Ratings

Category Moodys S&P FitchPrime Aaa AAA AAAHigh Grade Aa1 AA+ AA+High Grade Aa2 AA AAHigh Grade Aa3 AA‐ AA‐Upper Med A1 A+ A+Upper Med A2 A AUpper Med A3 A‐ A‐Lower Med Baa1 BBB+ BBB+Lower Med Baa2 BBB BBBLower Med Baa3 BBB‐ BBB‐

Institution Debt Outstanding [1] Moodys S&PABAC 42,560,000 A3 ‐Albany State University 78,895,000 ‐ A+Armstrong Atlantic State University 93,780,000 A2 ‐Atlanta Metropolitan College ‐ ‐ A+Augusta State University 29,110,000 A2 ‐Bainbridge College [2] 21,005,000 ‐ ‐BOR/OIIT 11,050,000 Aa2 ‐Clayton State University 70,555,000 ‐ A+College of Coastal Georgia [2] 28,955,000 ‐ ‐Columbus State University 65,166,433 A2 ‐Dalton State College [2] 7,130,000 ‐ ‐Darton College 45,885,000 ‐ A+East Georgia College [2] 8,910,000 ‐ ‐Fort Valley State University 81,960,000 A3 ‐Gainesvil le State College 11,715,000 ‐ ‐Georgia College & State University 146,530,000 A2 A+Georgia Gwinnett College 162,570,000 ‐ A+Georgia Highlands College 19,285,000 ‐ A+Georgia Institute of Technology [3] 503,475,000 Aa3 AA‐Georgia Perimeter College 77,965,000 A2 ‐Georgia Southern University 207,725,000 A1 ‐Georgia Southwestern State University 40,565,000 A2 ‐Georgia State University 358,325,000 A1 ‐Gordon College 32,830,000 A3 ‐Kennesaw State University 358,675,000 A1 A+Macon State College 12,405,000 ‐ A+Medical College of Georgia [4] 29,435,000 ‐ ‐Middle Georgia College 62,895,000 ‐ A+North Georgia College & State University 154,025,000 ‐ A+Savannah State University 103,935,000 ‐ A+South Georgia College 35,525,000 A3 ‐Southern Polytechnic State University 92,920,000 A2 ‐University of Georgia 295,819,285 Aa2 ‐University of West Georgia 140,460,000 A1 ‐Valdosta State University 191,988,775 A1 ‐Waycross College ‐ ‐ ‐Total 3,624,029,493 [1] As of October 25, 2011 [3] 2010B Bonds rated Aa1/AA+[2] GHEFA Financing Rating (A2/A+) [4] Insured rating

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Current Tax-Exempt Interest Rates

Year A1/A+ Aa22013 1.500% 0.650%2014 1.7 80% 1.030%2015 2.140% 1.390%2016 2.510% 1.7 60%2017 2.7 90% 2.010%2018 3.030% 2.27 0%2019 3.310% 2.560%2020 3.550% 2.800%2021 3.67 0% 2.920%2022 3.7 90% 3.040%2023 3.930% 3.180%2024 4.060% 3.310%2025 4.180% 3.430%2026 4.290% 3.540%2027 4.390% 3.640%2028 4.490% 3.7 40%2029 4.590% 3.840%2030 4.660% 3.910%2031 4.7 30% 3.980%2032 4.7 7 0% 4.17 0%2033 4.7 7 0% 4.17 0%2034 4.7 7 0% 4.17 0%2035 4.7 7 0% 4.17 0%2036 4.7 7 0% 4.17 0%2037 4.820% 4.220%2038 4.820% 4.220%2039 4.820% 4.220%2040 4.820% 4.220%2041 4.820% 4.220%2042 4.820% 4.220%

Value to a higher rating:• 60 basis point difference between A1/A+ and Aa2• Viability of bond insurance is uncertain


Sample New Project Financing

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Today’s Market Rule of Thumb:$800,000 of Debt Service = $10,000,000 Project

Project Size $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000

SOURCES OF FUNDSPar Amount of Bonds 11,380,000$ 22,715,000$ 34,015,000$ 45,350,000$ 56,650,000$ Original Issue Premium/(Discount) 105,387 210,323 314,912 419,907 524,535 Accrued interest ‐ ‐ ‐ ‐ TOTAL SOURCES OF FUNDS 11,485,387$ 22,925,323$ 34,329,912$ 45,769,907$ 57,174,535$

USES OF FUNDSFixed Costs of Issuance 159,663 285,565 398,793 506,427 610,417 Debt Service Reserve Fund (50%) 402,963 803,459 1,202,347 1,602,500 2,001,494 Capitalized Interest Fund (2 Years) 911,340 1,819,277 2,724,123 3,631,950 4,536,889 Project Cost 10,011,421 20,017,022 30,004,650 40,029,030 50,025,736 TOTAL USES OF FUNDS 11,485,387$ 22,925,323$ 34,329,912$ 45,769,907$ 57,174,535$

Average Annual Debt Service $806,000 $1,607,000 $2,405,000 3,205,000.00 $4,000,000Project Size as % of Principal 87.97% 88.12% 88.21% 88.27% 88.31%Capitalized Interest Fund 8.01% 8.01% 8.01% 8.01% 8.01%Debt Service Reserve Fund 3.54% 3.54% 3.53% 3.53% 3.53%Costs of Issuance 1.40% 1.26% 1.17% 1.12% 1.08%


Refunding Analysis

Refunding Essentials:• Existing bonds typically have a 10-year call protection• Escrow pays existing bonds until the call date

• Low short term rates (negative arbitrage) is very costly• Couponing (selling at a premium or discount) effects savings• Establish a savings threshold, i.e. 3% present value savings

Considerations:• Refunding might add annual fees that did not exist on original debt

• Authority, BOR, etc.• Who retains the savings? Project, LLC, Institution, BOR or State• Rental Payments can not increase• Rated debt refunding insured debt

Current Status:• $3.6 billion outstanding• $255.7 million of principal

(only 7% of all maturities) generates 3% or greater present value savings


USG Fiscal Year Debt Service

36


USG Debt by Repayment Sources

37

Revenue Sources OutstandingHousing Rents 2,040,721,433 Student Fee 430,758,060 Student Center Fee 302,160,000 Research 345,060,000 Operating Funds 305,115,000 Parking Fee 135,085,000 Meal Plan 27,435,000 Continuing Education 23,295,000 Bookstore 14,400,000 Retail Space ‐

3,624,029,493


USG PPV Debt by Institution

38


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